Life after Ketchell: Still a Lesson for Franchisors

Ketchell (Master Education Services Pty Limited v Ketchell [2008] HCA 38) was recently subject to a successful appeal to the High Court of Australia.

All Franchisors would be aware of the significance of the case. The High Court decision is clearly a correct one and the High Court’s decision allows commercial certainty. The cloud of uncertainty over the validity of franchise agreements is now removed and Franchisors can now sigh relief.

Despite this, the case should not be forgotten and it continues to serve as a powerful reminder to franchisors of the importance of ensuring compliance with the requirements of the Franchising Code of Conduct (the “Code”).

Background

In Ketchell, the franchisor had not received the signed statement required under Clause 11 of the Code (even though the franchisee had actually received the disclosure document and presumably understood the disclosure document given) that she had received independent legal advice.

Many years later, the franchisor sued the franchisee for monies owed under the franchise agreement. The franchisee defended the claim relying on the franchisors failure to comply with the Code, alleging this made the franchise agreement illegal and unenforceable.

The case went through a series of hearings and appeals, with the NSW Court of Appeal last year agreeing with the franchisee that such a breach of the Code made the franchise agreement illegal. The Court refused to enforce any of the terms of the agreement and therefore held that the franchisor could not claim monies due under the agreement.

Concerned as to the effect this decision could have on the validity of many franchise agreements, the Franchising Council of Australia supported by the Franchise industry funded the appeal to the High Court.

High Court Decision

The High Court unanimously held that a breach of the Code does not necessarily invalidate a franchise agreement.

In Ketchell, the franchisor’s failure to obtain the required certificate had not caused any loss or detriment to the franchisee.

However, the Court explicitly stated that there may be circumstances in which non-compliance with this or any other provision of the Code might be serious enough to make it appropriate for a court to find that the agreement should not be enforceable.

A failure to comply with the Code provides a Franchisee an opportunity to raise a wide range of remedies under the Trade Practices Act 1974. A Court may order the terms of an agreement be varied, an agreement to be terminated, or that a franchisor provide a franchisee with compensation for loss and damage, caused by their failure to comply with the Code.

The Court made it clear that the individual circumstances of any breach and the impact of a breach on the franchisee would dictate the appropriate remedy.

The Lesson

The High Court’s decision in Ketchell was, in our view, clearly correct. A Franchisor should continue to ensure they have a system of compliance and training and monitoring of their paperwork to ensure Code compliance.

Have you?

• Prepared a complete and accurate and up-to-date disclosure document in accordance with the requirements of the Code;
• Given a franchisee a copy of the disclosure document (including a copy of the Code and the proposed franchise agreement) to the franchisee at least 14 days before entering into the franchise agreement; and
• Obtained the certificates required by clause 11 of the Code.

Wisewoulds can assist and support Franchisors compliance, provide inhouse compliance systems and packaged Franchise Documents at a fixed cost (payable by the Franchisee)

Rigorous compliance with the Code will give franchisor’s confidence in their contractual arrangements with franchisees, and a stronger bargaining position in the event of a dispute.